Elevate Your Career: Conquer CAPS Module 2 in 2025 – Unlock Your Apartment Guru Skills!

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What does a low debt coverage ratio (DCR) signify to lenders?

High investment returns

Low risk assessments

High-risk properties

A low debt coverage ratio (DCR) signifies to lenders that there is a higher risk associated with the property. DCR is calculated by dividing the net operating income (NOI) of a property by its total debt service (the total amount of loan payments). When the DCR is low, it indicates that the property's income is insufficient to cover its debt obligations. This raises red flags for lenders, as it suggests that the property may struggle to generate sufficient revenue to meet its financial commitments, making it a potentially risky investment.

In contrast, a higher DCR indicates that a property is generating sufficient income to cover its debt payments comfortably, leading lenders to view it as a lower-risk investment. Therefore, a low DCR not only reflects current financial health but can also foreshadow future difficulties, causing lenders to view the property and its investment potential with caution.

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